A remodeled Gap (GPS) has been named Yahoo! Finance's first ever "Company of the Year."
After years of being out of fashion, a bit of reinvention went a long way in 2012 for the Gap, its management and its investors: Shares of the retailer soared. It raised its dividend and set plans to repurchase shares. Revenue is on track to grow sequentially for only the second time in six years, and earnings are expected to climb sharply.
When you think "Gap" and "Company of the Year," you might be scratching your head. But remember, and this is key, this pick was about 2012, not the last five years, not the next five. And it's been a very good, and memorable, year for the San Francisco-based clothing shop.
With a 71% stock-price increase since the start of the year (through Dec. 11), Gap placed in the top 4% of the S&P 1500. Meanwhile, it rewarded stockholders by boosting its dividend more than 10% to 50 cents annually and announced it would reduce the number of shares on the market with a $1 billion buyback.
Gap gave upbeat forecasts for the first three quarters of year, each time predicting profit beats, and overall 2012 earnings growth is expected to rise 33.5% from last year. Analysts project revenue will be up 7% for the year, which is quite an accomplishment: Gap's sales have been down four of the last five years. Additionally, it's on pace for four straight quarters of same-store sales growth.
Also on the plus side, Gap's not burdened with excessive debt, its multiple is very reasonable among its peer group, and net margins are forecast by Wall Street to come in at a solid 7.2% for the year.
Gap's Big Year
Source: FactSet, Yahoo! Finance, Gap Inc.
Back in Business
That's quite a turnaround since the early 2000s when Gap seemed nearly done, and same-store sales fell month after month. The brand that only a few years earlier was a destination in malls nationwide looked like a relic of the '90s, a chain whose popularity had peaked when it managed to help spur a brief but powerful resurgence in swing dancing and Louis Prima.
For years after, Gap languished and appeared headed for the closeout bin. Then came 2012, which has gone a long way toward erasing the largely unremarkable past decade -- in recent months, the stock peaked above $37 and was in territory it hadn't seen in 12 years.
Now the numbers-gathering was the easy part. Determining the "goodness" of a company isn't as much. Our "Company of the Year" award takes in a variety of factors, including but not limited to financial performance. Corporate governance, shareholder rights, community service and employee satisfaction also helped put Gap at the top of our inaugural ranking.
Many firms make at least a minor effort to be seen as righteous, but clearly not all are.
In Gap's situation, we found an organization that cares deeply about these intangibles. Gap has been a top-rated corporate citizen several times since 2000 in a yearly report produced by Corporate Responsibility magazine. This year, Gap ranked No. 13 overall and No. 4 in employee relations on the publication's 100 Best Corporate Citizens 2012 list, which gauges a company's standing in areas such as the environment, climate change, human rights and philanthropy.
Put another way, the company wants to be known as a corporation with a conscience -- and it walks the walk.
As for executive pay, shareholders haven't had to worry lately about the chief executive collecting a king's ransom while they suffered. CEO Glenn Murphy does make what to most of us is an extraordinary sum -- his 2011 total compensation was $9.7 million. No one's suggesting you feel sorry for him, but let's put it in perspective: According to an AP survey, using Equilar data, the average last year for U.S. CEOs was $9.6 million, putting Murphy right on the number. You might still consider that exorbitant, yet it's not remotely out of line for an American corporation these days.
Plus, he measures up well against his direct competitors:
Source: FactSet, SEC filings
Not a Perfect Fit
Gap was not a clear-cut choice, and a few items did give us pause:
--While the board has nine independents of 10 total members, a potential negative is that CEO Murphy is also chairman. Some shareholders might prefer separate roles. That said, it's not necessarily a red flag on its own.
"The idea of splitting the CEO and chairman position does get a lot of talk and discussion," says Ralph Ward, a writer and speaker on governance issues and the publisher of the Boardroom Insider."But when you actually sit down with major investor groups and even companies that are doing the shareholder-grading for proxy issues … you find out that actually having or not having the top role split isn't that critical of an issue yet."
--Since a deadly 2010 fire in a supply factory in Bangladesh, the company says it has "redoubled our efforts" to improve safety in the region. That's important, and it's not a small matter. Another recent fire at a garment plant in the same country, this one killing more than 100 workers, showed that safety remains a serious issue for Western retailers who source goods from Asia.
Gap has an opportunity to play a pivotal role in improving the lives of overseas workers, and there's no doubt labor activists would love to see even more from the company. At a minimum, this will need to remain a focus for Gap if it's going to be perceived as a company that's doing the "right" thing.
--Because Gap is a retailer, salaries for store associates aren't high. While hourly compensation is in line with other apparel chains, based on employee reports provided to Glassdoor.com, and store managers can make more than $56,000 a year, it's not a get-rich atmosphere for the rank-and-file employee.
Still, median household income was just above $50,000 in the U.S. in 2011, Census Department data indicate, meaning the average manager does crack the upper half of income earners in the nation.
Glassdoor's employee survey had 788 responses, with the company getting a 3.3 average rating out of 5.0, and 67% of those workers said they would recommend a job at Gap to a friend. Career site Indeed.com had a survey of 449 respondents, with the company averaging 4 out of 5 stars.
Hourly Pay in Retail (Glassdoor.com)
And there you have it. Gap remains a turnaround story, but it did enough right, and avoided the big mistakes, to take home Yahoo Finance's inaugural" Company of the Year" award for 2012. Duplicating this won't be easy in the coming year. Becoming the champ is one thing, repeating is quite another.
Now you tell us: Do you like the Gap pick or not? If not, who's your company of the year, and why?